Student loan payments, balances up in air as court nears ruling on Biden plan: What to know

Crunch time is drawing near for millions of Americans who applied for or were otherwise eligible for COVID-19 student-loan debt relief, including a half-million or more borrowers in Arizona.

The U.S. Supreme Court heard arguments in February about President Joe Biden’s student debt-relief program after a lower-court ruling put the program in limbo and halted further applications for relief. The high court is expected to release a decision on the fate of the massive debt-forgiveness proposal before it recesses for its summer break.

The Biden student loan debt relief plan has two distinct parts.

The high court decision will affect the forgiveness or cancellation of debt for some borrowers.

Separately, all borrowers haven't had to make loan payments for the past three years because of a pandemic-era "pause." Payments had been scheduled to resume later this year, and the debt-ceiling deal negotiated by President Biden and House Speaker Kevin McCarthy affirms that. That pact has been approved by the House and awaits a vote in the Senate.

If approved, payments are likely to start up again by around the end of August, though uncertainty remains on the exact timing.

The Biden administration's plan was intended to help eligible borrowers transition back to making regular payments as temporary pandemic-relief support winds down. In addition to this pause, or delay, in required payments, the plan would forgive or cancel up to $20,000 in such debts for some low- and moderate-income borrowers.

More: Women account for two-thirds of US student loan debt. Here's how it affects them.

That piece of the puzzle is still up in the air, pending Supreme Court action.

The U.S. Department of Education has promised to alert borrowers before they need to start making payments again.

Loan payments put on hold for courts to decide legal issues

The Biden administration has extended the loan-repayment pause several times.

"It isn't fair to ask tens of millions of borrowers eligible for relief to resume their student debt payments while the courts consider the lawsuit," Biden said in a November video.

No one with a federally held loan has had to make loan payments since Biden took office. “While litigation is preventing us from providing the relief needed to avoid these harms, we don’t think it’s right to ask you to pay on loans you wouldn’t have to pay were it not for the lawsuits challenging the program,” according to a statement from the Department of Education.

Conversely, critics have argued that former students should be required to make good on their payments, as other types of borrowers must.

Student-loan borrowers haven't had to make such payments since March 2020, but starting them up again could be a struggle. Various phase-in measures such as rolling out the process gradually could apply. These policies generally apply to federally held student loans, not all such debts.

Millions could benefit from debt relief. Some could get $20K erased

According to the White House, 26 million borrowers either applied for student-loan debt relief or had already provided sufficient information to the Department of Education to be deemed eligible. Applications for relief from more than 16 million borrowers were fully approved by the department and sent to loan servicers.

However, the department in November put the program on hold and stopped accepting applications as a result of two separate lawsuits brought by opponents. Loan servicers have been prevented from discharging any debts.

Nationally, more than 40 million borrowers would qualify for the debt-relief program, according to the Biden Administration. More than 600,000 Arizonans could be eligible, including 496,000 who already applied for or were deemed eligible for relief.

Of these, 314,000 Arizonans were set to have their debts discharged, of more than 16 million people nationally who applied, before that aspect of the program was halted.

If the Supreme Court sides with critics and requires student-loan payments to resume without providing debt relief, the Department of Education expects a surge in delinquencies and defaults.

Even before the pandemic, many borrowers had trouble making payments. For example, 42% of Pell Grant recipients have defaulted at least once on their loans, according to department undersecretary James Kvall. Pell Grants typically are given to undergraduate students facing significant financial need, and recipients include many people of color.

The Biden proposal would provide up to $20,000 in debt relief to Pell Grant recipients with loans held by the department and up to $10,000 in relief to non-Pell loan recipients. Borrowers would be eligible for debt relief if their income is below $125,000 for individuals or $250,000 for couples.

What will the Supreme Court decide on debt relief?

Some legal and other experts have said they don’t expect the Supreme Court to approve the debt-relief program, given the conservative leaning of the high court. That could drive up delinquencies and defaults, they fear.

"The most likely outcome is that the Supreme Court will rule that the federal government does not have power to forgive debt without an act of Congress," said Andrew Housser, co-CEO of digital personal-finance company Achieve, which has a large office in Tempe.

"Regardless of the outcome, though, forbearance of student loans ends on June 30, which is going to create payment shock for millions of Americans."

How to prepare if student loan payments resume

With student loan forbearance coming to an end, more people likely will face financial stress, Housser said. Many already are struggling. In a recent Achieve poll of Americans generally, 66% of those surveyed said they were living paycheck to paycheck and 51% reported having less than $1,000 set aside for emergencies.

Housser said borrowers with student-loan debts should put together budgets covering at least the next 12 months. Some debtors, including those grappling with credit-card balances, also might need to look at debt resolution services, a debt-consolidation loan or other options, he said.

Consequences of defaulting on a student loan include no longer being able to work out a new repayment plan, possibly having wages garnished and facing the possibility of the Internal Revenue Service holding income-tax refunds, Kvall said in written testimony before a House committee.

Defaults would be reported to credit bureaus, making future credit and loans more costly and difficult to obtain.

What else should borrowers watch out for?

As the topic heats up again with Supreme Court action imminent, many borrowers might struggle to get accurate, updated information.

The Department of Education warns the public to be aware of scam artists offering help in getting a loan discharged, canceled or forgiven for a fee.

“You never have to pay for help with your federal student aid,” the department said.

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This article originally appeared on Arizona Republic: Student loan relief court ruling expected soon. How to prepare